Travel agents are known conduits for bribes in China
The head of the economic crime investigation unit of China’s Ministry of Public Security has alleged that GSK has transferred CN¥3 billion (US$489 million) through travel agencies since 2007. The ministry said it found evidence that GSK’s sales personnel in China rewarded medical and hospital personnel, government officials and foundations with cash and perks for prescribing medications. The ministry also said it suspects GSK’s high-level personnel accepted bribes through conference rebates and project fees.
State-owned broadcaster China Central Television (CCTV) aired a prime-time segment detailing how executives at the United Kingdom drug manufacturer used a travel agency to funnel bribes to government officials. The CCTV report featured Liang Hong, operations manager for GSK China, explaining how executives passed bribes to drug regulators and pricing officials at the National Development and Reform Commission. At the time of print, Chinese police have detained at least twenty-two of GSK’s executives and employees, as well as medical personnel, as part of their investigation, which began in June.
Utilising travel agencies to conduct corrupt business is not a recent notion. For many years, compliance professionals working in China (and other emerging markets) have disagreed with sales and marketing teams about how essential it is to engage a local travel agency to help with a company event. Sales and marketing teams have come up with myriad reasons for why local companies must be engaged, but the fact of the matter is that they generally end up doing all sorts of services that were not disclosed when they were originally employed.
THE TRUTHS AND MYTHS ABOUT TRAVEL AGENCIES IN CHINA
China does regulate travel agencies. As part of a law promulgated in 2009 by the State Council, China now regulates travel agencies. The law also allows for the registration of foreign invested travel agencies. The suggestion from sales and marketing that only local travel agencies should be engaged because foreign ones are illegal and unregistered is a myth.
Foreign travel agents can operate nationwide for domestic business in China. The suggestion that you need to engage a local travel agent because the international ones do not have offices throughout China or representation in the cities where you may need support is a myth. Large multinational travel agency companies operate in China and in all major centres.
Local agencies need to be engaged as they speak Chinese. This is clearly a myth – the days of foreign companies operating in China but only speaking English are gone.
Local companies have better relationships with local providers, including hotels and tour operators. This may be correct and is common sense; however, there is no reason that internationally-based travel agents cannot negotiate locally. The local negotiations come down to market prices and simple economics. This alone is not a sufficient reason to go to local agencies; compliance costs and the risk of executives being jailed must weigh against the cost of a hotel room being slightly more expensive.
Local travel agencies are often used to arrange events. Unlike many basic travel agencies outside of China, local Chinese agencies are often used to provide services such as managing events. These events are akin to training events, kick-off meetings, customer meetings, town-hall meetings, customer demonstrations, conferences and similar gatherings. As part of these events, the travel agent arranges domestic travel and hotels, but also arranges the associated services, including invitations, press management, restaurant bookings and photography. It is these ancillary services that are at the biggest risk for misuse of funds. Often the invoices for these events intentionally do not disclose all the ancillary services. In some cases, the invoices simply list “service fees” (often up to 25 percent). It is these service fees which are often used for bribery and offering participants additional services. The most likely use of these funds goes towards the participants, often in the form of sexual favours (charged to a central account at the hotel), excessive bar bills or gift-shop purchases.
Local travel agencies often only issue “official receipts”. It is not uncommon when looking at transactions involving travel agents in China to see only the official fa piao receipts. These are receipts that just list the total amount of the invoice, but no other particulars. Demand to see a proper invoice and the underlying costs of the services that are being provided to you. For example, if you have been charged for certain hotel costs and airline fees, demand to see the itemised and exact costs and ensure that they are passed on precisely as charged to the agent.
WAYS TO MANAGE RISKS WHEN ENGAGING TRAVEL AGENCIES
Consider a different charging model. If you are engaging an agent to conduct an event and manage the associated costs and effort, perhaps change the terms of the agreement to pay for actual justifiable and evidenced costs, with an hourly rate for services (justified by timesheets). Tightening up the controls for any incoming invoices is crucial to managing compliance risks.
Properly examine the invoices. Invoices need to be reviewed before payment. Any names listed that provided travel services, tickets or hotel rooms need to be cross-checked to make sure there was an actual reason for the service and that prior approval was given for the service. Caution should be exercised around the provision of services to non-employees.
Using international travel agents generally manages risk. Using a travel agent that is based in the United States, the United Kingdom or another key international market should reduce your risk. It would be expected that these international brands have a higher level of integrity, are bound by higher standards in their home markets and would take more steps to protect their clients. While this is usually the case, caution should be exercised for those international brands that operate through a franchise model where the local company simply adopts the persona of the international company, but is otherwise very local. Franchisees are typically not held to the same level of diligence regarding integrity in their local dealings, despite the inherent risks to the franchisor’s brand.
Conduct due diligence – which is not just a watchlist check. Before engaging a travel agency, conduct a background check. The background checks that are used by most companies in China for this level of supplier are too basic. Many companies think that running agencies through a watchlistservice will be sufficient; clearly this is not adequate and is highly unlikely to recover any information. At a minimum, you need to look at the following information, which is likely to include the agency’s financial information and basic books and records:
- Ownership information – cross-reference against employee lists and close associates of employees
- Connections with local hotels, airlines, restaurants and a review of payments to these hotels, airlines and restaurants to identify whether such payments are ever rebated back to the company and, if so, for what reason
- Look at the agencies’ general ledgers, payee information and charts of accounts and search for payee details that are not known payees of services that relate to the industry
- Ask for and review and contracts that are legitimate rebate agreements to ensure that the rebates flow back through to your company
- Look for payments to offshore companies, to individuals that seem unusual, or in currencies other than local currency
- Look for payments to media companies, PR companies or other people that may be a conduit for illegal payments.
Due diligence should relate to the transaction being considered. Too many times a supplier is assessed for due diligence based on a particular need. For example, you are looking to use a travel agent for staff domestic travel. The supplier agent in this situation might be subject to a lower risk due diligence (which would be relatively simple and inexpensive), then a year later the scope of the engagement with that third party supplier is expanded to work on a major event. In that case, the supplier has been already “approved” and is automatically used. This is a mistake and further due diligence would be required because the scope of the original due diligence was different.
Reduce your risk and buy online. The best way to manage an event in China and to facilitate those occasions when you are bringing people to your event, particularly customers or other suppliers, is to buy as many as possible of the travel services online. China has a vibrant online market for travel and it is quite inexpensive. Try to pay for all airline and hotel costs online (meeting rooms at hotels may be sourced separately). While there is a chance some of this could end up costing more in the long run, the compliance risks will be reduced significantly. Use corporate credit cards (which are now becoming available in China) for all expenses for better expense tracking.
“Insource” the entire function. Another option is to “insource” the event management services that are provided. Too many companies have been quick to outsource to save a few dollars, yet in China headcount costs are not expensive. Insourcing is a strong step towards better compliance.